Home Theater, PC Sales Falloff Fueled Best Buy Q1 Comp Sales Decline

The retailer revised full-year guidance to reflect first-half softness, said Chief Financial Officer Matt Bilunas. The revenue outlook for FY ’23 is $48.3 billion-$49.9 billion vs. the prior outlook of $49.3 billion-$50.8 billion; the company no longer provides quarterly guidance. Bilunas said Q2 results will be similar to Q1 results, after March showed the biggest Q1 sales decline and trends continued through the end of the quarter: “Actually, it was a little more pressure on sales than we expected,” he said, citing the lapping of stimulus payments that produced a 30% comp sales bump in the first few weeks of May last year.

Barry noted the tough compare with Q1 ’21 revenue, which was propped up by stimulus spending and two years of “unusually strong demand” during the COVID-19 pandemic for stay-at-home-focused purchases. Computing sales vs. Q1 ’20 grew over 30%, she noted.

Promotional activity in CE is returning to typical levels, after slowing during the pandemic due to high product demand and supply shortages. Bilunas said the company expected promotions “to be a pressure” in Q1 vs. the year-ago quarter and thought “eventually they would return closer to FY '20 levels at some point.” As the quarter progressed, “we actually started to see a little bit more pressure on the promotion side than we expected." Some products “were even more promotional than we expected … and were similar to pre-pandemic levels,” Barry said. Promotions were across most categories, though skewed higher to TVs and computers. Some “iconic” products were promotional, “even though in some cases inventory is constrained,” Bilunas said. Barry noted that promotions are a “function of relationships with our vendors as well.”

Average selling prices have increased due to fewer markdowns over the past couple of years, inflation and a changing sales mix toward more premium products -- a trend that accelerated during the pandemic, Barry said. Appliances, which carry a higher ASP, have become a larger part of the retailer’s mix, she said. Unit levels in some categories are down vs. pre-pandemic levels: “A lot of that is being driven by the confluence of ASP increase,” she said. Appliance sales climbed 3% on top of 67% growth in Q1 last year, she said. Bilunas noted appliances have been a growth category for Best Buy for every quarter over the past 10 years, except for one in 2020 when stores were closed during the pandemic.

Vendors are absorbing higher transportation and component costs, which has led to higher cost of goods sold, Barry said: “In many cases, we have passed through the higher cost of goods sold in the form of higher prices to customers.”

CE product availability is “much better than it has been for much of the pandemic,” said Bilunas, while noting continued transportation challenges and higher costs for containers, labor and fuel. The company invested in various aspects of the supply chain over the past few years that helped it “navigate the environment and mitigate the impacts.” Bilunas referenced Best Buy’s portfolio approach toward carriers, transportation partners and parcel delivery partners and the retailer’s “deep relationships across our supply chain, including port carriers and deconsolidation operations.” It used rail and over-the-road transportation to mitigate cost increases.

Barry credited strong vendor relationships for Best Buy’s ability to “limit our exposure to the more turbulent spot market” during supply chain disruptions: “Working closely with our vendors, we have a great deal of visibility into, and can influence the status of, product in the supply chain process.” Best Buy also handled transportation for many vendors, “meaning we take control in Asia or Mexico,” she said, which gives the retailer visibility and control of “inventory movement and costs.”

Inventory is up 9% after an “unusually low” quarter last year and is now “almost perfectly aligned with the sales growth," Barry said. The inventory position is a “key testament” to vendor partnerships and Best Buy's ability to manage inventory in accordance with demand. Units in some key categories are still down, she said, citing mix shift and inflation. There are “still some spotty constraints in very isolated areas for specific vendors and some of the more iconic SKUs.”

On the economic environment, Barry said, “Consumer electronics, over time, is a stable industry.” The category showed its importance over the past two pandemic years, she said; the retailer was planning for a decline this year on lower demand. That’s been compounded by inflation and concerns over war in Ukraine, she said. “We will not assume a full recession at this point,” she said, calling it instead a “a softer environment.”

Best Buy remains optimistic about its fledgling $199-per-year Totaltech membership offering, despite margin pressure of 100 basis points in Q1, said Barry, who called the program “a near-term investment to drive longer term benefit.” Management expects margin pressure to ease when the program laps its October launch: “Over time, we expect the incremental spend we garner from members will lead to higher operating income dollars,” she said.

Expanding in Q&A, Barry said the goal of Totaltech is to “create a moat around the consumer and to make it kind of inconceivable for them to buy CE anywhere else.” The program is designed to have a “broad reach,” covering various demographics. The Apple Care warranty that’s part of the program resonates with younger shoppers, price and discounts hit home with all customers, and tech support resonates with older customers, she said.

As part of a “reimagining” of physical stores, Best Buy is remodeling 45 locations this year that will have the "experience store” concept, including ones in Chicago, Houston and Phoenix. Over the next 18 months, it will bring electric scooters and bikes to stores, Barry said, as part of an expansion to new categories that also includes health and beauty tech.

The retailer is also opening 15 more outlet stores to sell open-box, clearance, end-of-life and “otherwise distressed” TV and appliance inventory “that might otherwise be liquidated at a significantly lower recovery rate,” Barry said. Best Buy sees twice the recovery rate of cost of goods sold “when we sell this product at our outlets vs. alternative channels,” she said. Outlets also bring in new customers, with 16% of customers last year new to Best Buy and 37% “reengaged.” The retailer is expanding the product assortment to include computing, gaming and mobile phones. Outlet stores are also part of the company’s “circular economy strategy” to give products a second chance to be sold vs. scrapped in landfill, Barry said.

On Best Buy’s Ads business, Barry noted it’s selling advertising to brands that want to reach its customers, on its own and external websites. “What’s important here is that our leadership in CE retail remains very, very valuable, high customer traffic and engagement," she said. Best Buy's first-party data allows advertisers to reach unique audiences, she said.